Whilst perhaps not an essential in the sense of needing it to live, petrol is about as close as you can get to a ‘non-essential necessity’ these days. Most families have a car (many have more than one) and despite the hikes in petrol prices we’ve seen across the UK, demand for petrol has remained high: it is a prime example of a good with a highly inelastic demand.
Over the past few years many families have chosen to forego their holidays abroad and instead have taken to summer vacations across the UK in a bid to save money. However, with the summer season approaching and families beginning to think about where to go or plan their trips, one thing that should be considered is the cost of travel. Petrol prices across Europe have risen faster than those in the UK over the past year and this may pose a significant cost and possibly deterrent to European travel. As Sarah Munro of the Post Office said:
‘The high fuel price increases in Europe mean that UK holidaymakers should plan their routes carefully in advance to cut costs’.
Petrol prices were found to be the lowest in Luxembourg at 128p per litre and the highest in Norway at 182p – a definite deterrent to filling up your tank in Scandinavia. Despite motorists’ constant exclamations of the price of petrol in the UK, of the 14 countries surveyed the UK came in as the 4th cheapest at 136p. It also had the smallest increase since 2010 of 14p, compared to the average of the countries surveyed of 27.8p.
Although the higher fuel prices have been fuelled (no pun intended) by rising wholesale oil prices, when crude prices started to fall, petrol prices didn’t decline to match. This has sparked an inquiry into petrol prices, with demands for more transparency into the price setting behaviour of firms. The British Petrol Retailers’ Association is planning on referring its concerns to the Office of Fair Trading. So the moral of the story: petrol prices are high in the UK, but if you’re going on holiday this summer, you’ll probably find that many other countries across Europe have even higher prices, so planning is essential.
Holiday hike: European petrol prices soar by up to 35 per cent Daily Mail Online, Sarah Gordon (10/6/11)
UK holidaymakers ‘face high petrol prices’ BBC News (10/6/11)
Petrol prices are 35% higher in Europe than last summer Mirror, Ruki Sayid (10/6/11)
Motoring coalition calls on EU to investigate soaring price of petrol Telegraph, Rowena Mason (10/6/11)
Motoring groups demand petrol price investigation BBC News (30/5/11)
Questions
- How are European petrol prices set?
- Why does the exchange rate against the dollar have a big impact on oil prices?
- Why have petrol prices in the UK not increased by as much as other European countries over the past year?
- Why is there likely to be an investigation into how prices are set? Which factors do you think will be considered?
- The Telegraph article talks about the sport market. What is this and how does it affect how petrol prices are set?
- Why does petrol have such inelastic demand?
- If a higher tax is imposed on petrol, why is it that much of the cost will be passed on to consumers in the form of a higher price? Illustrate this on a diagram.
Economics studies the choices people make. ‘Rational choice’ involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs. This surplus will be maximised when people do more of things where the marginal benefit exceeds the marginal cost and less of things where the marginal cost exceeds the marginal benefit. But, of course, measuring benefits and costs is not always easy. Nevertheless, for much of the time we do make conscious choices where we consider that choosing to do something is ‘worth it’: i.e. that the benefit to us exceeds the cost.
When we make a choice, often this involves expenditure. For example, when we choose to buy an item in a shop, we spend money on the item, and also, perhaps, spend money on transport to get us to the shop. But the full opportunity cost includes not only the money we spend, but also the best alternative activity sacrificed while we are out shopping.
Then there are the benefits. Not all pleasurable activity costs us money. The sight of beautiful contryside or the pleasure of the company of friends may cost us very little, if anything, in money terms. But they may still be very valuable to us.
If we are to make optimal decisions we need to have some estimate of all costs and benefits, not just ones involving the payment or receipt of money. This applies both to individual behaviour and to collective decisions made by governments or other agencies.
Cost–benefit analysis seeks to do this to help decisions about new projects, such as a new road, a new hospital, environmental projects, and so on. But just how do we set about putting a value on the environment – on the pleasure of a walk in bluebell woods, on protecting bird life in wetlands or sustaining ecosystems?
For the first time there has been a major study that attempts to value the environment. According to the introduction to the report:
The UK National Ecosystem Assessment (UK NEA) is the first analysis of the UK’s natural environment in terms of the benefits it provides to society and the nation’s continuing prosperity. Carried out between mid-2009 and mid-2011, the UK NEA has been a wide-ranging, multi-stakeholder, cross-disciplinary process, designed to provide a comprehensive picture of past, present and possible future trends in ecosystem services and their values; it is underpinned by the best available evidence and the most up-to-date conceptual thinking and analytical tools. The UK NEA is innovative in scale, scope and methodology, and has involved more than 500 natural scientists, economists, social scientists and other stakeholders from government, academic and private sector institutions, and non-governmental organisations (NGOs).
The following podcast and webcast look at the report and at some of the issues it raises in terms of quantifying and incorporating environmental costs and benefits into decision taking.
Podcast and Webcast
‘The hidden value’ of our green spaces BBC Today Programme, Tom Feilden (2/6/11)
Report puts monetary value on Britain’s natural assets BBC News, Jeremy Cooke (2/6/11)
Articles
NEA report highlights need for biodiversity Farmers Guardian, Ben Briggs (2/6/11)
Nature is worth £19bn a year to the UK economy – report Energy & Environmental Management Magazine (2/6/11)
In praise of… the unquantifiable Guardian (3/6/11)
Priceless benefits of bluebell woods Guardian letters, Dr Bhaskar Vira and Professor Roy Haines-Young (4/6/11)
Nature ‘is worth billions’ to UK BBC News, Richard Black (2/6/11)
Putting a price on nature BBC News, Tom Feilden (2/6/11)
Value of Britain’s trees and waterways calculated in ‘ground-breaking’ study The Telegraph, Andy Bloxham (2/6/11)
Nature worth billions, says environment audit Financial Times, Clive Cookson (2/6/11)
Nature gives UK free services worth billions Planet Earth, Tom Marshall (3/6/11)
UK scientists put price on nature with National Ecosystem Assessment GreenWise, Ann Elise Taylor (2/6/11)
Report
UK National Ecosystem Assessment: link to report DEFRA
UK National Ecosystem Assessment (June 2011)
The UK National Ecosystem Assessment: Synthesis of the Key Findings
Questions
- How would you set about valuing the benefits of woodlands?
- According to the report, the health benefits of living close to a green space are worth up to £300 per person per year. How much credance sould we attach to such a figure?
- What do you understand by the ‘ecosystem approach’ and the term ‘ecosystem services’?
- Explain Figure 2 on page 3 of Chapter 2 of the report.
- Should decision makers quantify only those benefits of ecosystems experienced by humans? Would all environmentalists agree with this approach?
- What are the advantages and disadvantages of quantifying all costs and benefits in money terms?
- Compare the consequences over the next 50 years of a ‘world markets’ scenarios with that of a ‘nature at work’ scenario.
- What policy implications follow from the report?
The snow the UK has seen over the past two winters created massive disruption, but that is only one reason for hoping for a milder winter to come. With the cold weather, the UK economy faced threats of gas shortages, as households turned on their heating. However, despite the freezing temperatures, many households were forced to turn off their heating regularly, due to the excessive bills they would face. This trend is expected to be even more prevalent if the 2011/12 winter is as cold, as fuel tariffs are predicted to rise. The Bank of England has said that gas and electricity prices could rise this year by 15% and 10% respectively. British Gas’s Parent company, Centrica said:
“In the UK the forward wholesale prices of gas and power for delivery in winter 2011/12 are currently around 25% higher than prices last winter, with end-user prices yet to reflect this higher wholesale market price environment.”
These predictions might see the average UK household paying an extra £148 over the next year. Although these are only estimates, we are still very likely to see many households being forced to turn off their heating. One thing which therefore is certain: a warmer winter would be much appreciated!
Articles
Switch energy tariff to help beat bill rises Guardian, Miles Brignall (14/5/11)
Quarter of households predicted to turn off heating BBC News, Brian Milligan (14/5/11)
Power bills set to soar by 50% in four years Scotsman (14/5/11)
Domestic fuel bills poised to rise by up to £200 Financial Times, Elaine Moore (13/5/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- Which factors have contributed to rising energy prices? Illustrate these changes on a demand and supply diagram.
- To what extent do these higher prices contribute to rising inflation?
- What impact might these price rises have on (a) poverty and (b) real income distribution in the UK?
- Why are energy prices currently being investigated by Ofgem? What powers does the regulator have and what actions could be taken?
Are we heading for ‘perfect storm’ in commodity production and prices? Certainly the prices of many commodities have soared in recent months. These include the prices of foodstuffs such as dairy products, cooking oils and cereals, crude oil, cotton, metals and many other raw materials. The overall world commodity price index has risen by 28% in the past 12 months. The following are some examples of specific commodities:
Price rises in the 12 months to February 2011
• Wheat 62%
• Maize 59%
• Coffee 70%
• Beef 39%
• Sugar 46%
• Palm kernal oil 142%
• Soybean oil 50%
• All food price index 32%
• Crude oil 20%
• Cotton 132%
• Fine wool 55%
• Softwood timber 25%
• Iron ore 78%
• Copper 29%
• Tin 55%
• All metals index 58%
• Rubber 79%.
The problems are both short term and long term, and on both the demand and supply sides; and the effects will be at micro, macro and global levels. Some hard choices lie ahead.
The following webcast, articles and reports explore both the current position and look into the future to ask whether rising commodity prices are likely to continue or even accelerate.
The first link is to a BBC World Debate which considers the following issues: “Is scarcity of natural resources a serious challenge for developing and advanced economies? How great is the risk that scarcity might lead to conflict, both within and between nations? Might a scramble for resources lead to a retreat from globalisation and to greater protectionism?”
Webcast
World Debate: Resources BBC World Debate, Louise Arbour, President and CEO, International Crisis Group; James Cameron, Global Agenda Council on Climate Change; He Yafei, Ambassador and Permanent Representative of China to the UN; Malini Mehra, Founder and CEO, Centre for Social Markets; Kevin Rudd, Minister of Foreign Affairs, Australia (19/1/11)
Articles
Global Food Prices Continue to Rise Reuters, Steve Savage (7/3/11)
The 2011 oil shock The Economist (3/3/11)
Global Food Prices Will Probably Be Sustained at Record This Year, UN Says Bloomberg, Supunnabul Suwannaki (9/3/11)
Food prices to stay high as oil costs, weather weigh livemint.com, Apornrath Phoonphongphiphat (9/3/11)
‘Perfect storm’ threatens agriculture in developing nations Manila Bulletin, Lilybeth G. Ison (9/3/11)
IMF sees no immediate respite from high food prices Commodity Online (7/3/11)
Drought, supply, speculation drive world food prices to record high NZ Catholic (8/3/11)
The Factors Affecting Global Food Prices Seeking Alpha, David Hunkar (7/3/11)
World food prices climb to record as UN sounds alarm on further shortages FnBnews (India), Rudy Ruitenberg (9/3/11)
Food crisis: It’s a moral issue for all of us New Straits Times (Malaysia), Rueben Dudley (8/3/11)
Oil prices: Green light from the black stuff Guardian (5/3/11)
Cotton hits $2 a pound Guardian, Terry Macalister (17/2/11)
Supermarkets are raising prices faster than inflation, says UBS The Telegraph, Philip Aldrick (1/3/11)
What next for commodity prices? BBC News, Jamie Robertson (5/5/11)
Reports
FAO Cereal Supply and Demand BriefFood & Agriculture Organization, United Nations (March 2011)
Rising Prices on the Menu Finance & Development (IMF), Thomas Helbling and Shaun Roache (March 2011)
Data
Commodity prices Index Mundi
Commodities Financial Times, market data
Questions
- Identify the various factors that are causing rises in commodity prices. In each case state whether they are supply-side or demand-side factors.
- How can the price elasticity of demand and supply, the income elasticity of demand and the cross-price elasticity of demand be used to analyse the magnitude of the price rises?
- To what extent are rising food prices the result of (a) short-term (i.e. reversible) factors; (b) long-term trends?
- Why are food prices in the shops rising faster in the UK than in many other countries?
- To what extent is the future of food security and prices and moral issues?
- Why may current oil price rises become an opportunity for the future?
- What might be the respective roles be of government, business and consumers in responding to natural resource constraints?
Globalisation is a word we hear a lot of. The world economy is constantly changing and the financial crisis, from which the world is still recovering, is a prime example of just how interdependent nations are. Tony Blair has extended this idea of interdependence in the context of universities and the so-called knowledge economy. As technology advances and economies become more interdependent, international competitiveness is becoming increasingly important and this is one area where universities are vital.
“If you look at the world’s current and emerging superpowers, nearly all have either well-established or are currently establishing university systems that will help them compete in the global economy.”
Just how important is a country’s higher education system and what has been the impact of globalisation on them?
Tony Blair’s global ‘battle of ideas’ BBC News, Sean Coughlan (7/3/11)
Top schools face globalisation challenge Financial Times, Jonathan Doh and Guy Pfefferman (6/3/11)
Questions
- What do we mean by a ‘knowledge economy?
- What is globalisation and how is the interdependence of nations relevant to this concept?
- Tony Blair says that the world’s superpowers all have well-established or are currently establishing university systems. Why is it this helps them to compete globally?
- What are the benefits of higher education? Do they accrue mainly to the individual receiving the education or to society? On which factors does your answer depend?
- What role does information play in making the global education environment more competitive?